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51. Capital Flows to Emerging Market Economies: A Brave New World?

Author:
Shaghil Ahmed and Andrei Zlate
Publication Date:
06-2013
Content Type:
Working Paper
Institution:
Board of Governors of the Federal Reserve System
Abstract:
We examine the determinants of net private capital inflows to emerging market economies. These inflows are computed from quarterly balance-of-payments data from 2002:Q1 to 2012:Q2. Our main findings are: First, growth and interest rate differentials between EMEs and advanced economies and global risk appetite are statistically and economically important determinants of net private capital inflows. Second, there have been significant changes in the behavior of net inflows from the period before the recent global financial crisis to the post-crisis period, especially for portfolio inflows, partly explained by the greater sensitivity of such .flows to interest rate differentials and risk aversion. Third, capital control measures introduced in recent years do appear to have discouraged both total and portfolio inflows. Fourth, in the pre-crisis period, there is some evidence that greater foreign exchange intervention to curb currency appreciation pressures brought more capital inflows down the line, but we cannot identify such an effect in the post-crisis period. Finally, we do not find statistically significant positive effects of unconventional U.S. monetary expansion on total net EME inflows, although there does seem to be a change in composition toward portfolio flows. Even for portfolio flows, U.S. unconventional policy is only one among several important factors.
Topic:
Emerging Markets, Monetary Policy, Economic Growth, Interest Rates, and Capital
Political Geography:
North America and United States of America

52. Age and Productivity. Human Capital Accumulation and Depreciation

Author:
Anna Ruzik-Sierdzińska, Claudia Villosio, Maciej Lis, Michele Belloni, and Monika Potoczna
Publication Date:
11-2013
Content Type:
Special Report
Institution:
Center for Social and Economic Research - CASE
Abstract:
This report, titled "Age and Productivity. Human Capital Accumulation and Depreciation", was released within a project NEUJOBS- “The Impact of Service Sector Innovation and Internationalisation on Growth and Productivity”, funded by the European Commission, Research Directorate General as part of the 7th Framework Programme. The report focuses on links between age, productivity and lifelong learning. Various data sources (EU-SILC, LFS, Structure of Earnings Survey, SHARE, ELSA, SHARELIFE) and methodological approaches were used in this report. The analysis identifies clusters of countries with common characteristics of age-earnings profiles (for certain groups of employees) and allows for an explanation of those differences. Some differences can be attributed to the share of sectors, education types, and occupations in country-specific employment. Others are due to labour market institutions and the (dis)incentives to work at older ages provided by social security systems. Additionally, the dynamics of earnings after age 50 differ less between educational and occupational groups than at earlier ages. The authors show that the dynamics of average wages are strongly influenced by the timing of entering and leaving labour market. An estimation of the impact of LLL on productivity (measuredby earnings) at older ages shows that for employees aged 50+, participation in training increases wages in the short-term.
Topic:
Demographics, Economics, Human Capital, Aging, Labor Market, and Capital
Political Geography:
Europe

53. The Effect of TARP on Bank Risk-Taking

Author:
Lamont Black and Lieu Hazelwood
Publication Date:
03-2012
Content Type:
Working Paper
Institution:
Board of Governors of the Federal Reserve System
Abstract:
One of the largest responses of the U.S. government to the recent financial crisis was the Troubled Asset Relief Program (TARP). TARP was originally intended to stabilize the financial sector through the increased capitalization of banks. However, recipients of TARP funds were then encouraged to make additional loans despite increased borrower risk. In this paper, we consider the effect of the TARP capital injections on bank risk taking by analyzing the risk ratings of banks’ commercial loan originations during the crisis. The results indicate that, relative to non-TARP banks, the risk of loan originations increased at large TARP banks but decreased at small TARP banks. Interest spreads and loan levels also moved in different directions for large and small banks. For large banks, the increase in risk-taking without an increase in lending is suggestive of moral hazard due to government ownership. These results may also be due to the conflicting goals of the TARP program for bank capitalization and bank lending.
Topic:
Governance, Interest Rates, Risk, Welfare, Capital, and Banking
Political Geography:
North America and United States of America

54. Foreign Banks in the U.S.: A Primer

Author:
William Goulding and Daniel E. Nolle
Publication Date:
11-2012
Content Type:
Working Paper
Institution:
Board of Governors of the Federal Reserve System
Abstract:
This paper describes the foreign banking landscape in the United States. It begins by establishing a vocabulary for discussion of the subject, and then identifies a number of important data-related issues. With that information in hand, the remainder of the paper focuses on identifying the most important underlying trends on both sides of the balance sheets of foreign-owned banks' U.S. operations. At each step, the investigation considers how foreign-owned banks compare to U.S.-owned domestic banks, and how two types of foreign banks operations in the U.S. -- branches and agencies of foreign banks (FBAs), and foreign-owned subsidiary banks (FSUBs) -- compare to each other. The banking sector in the U.S. experienced substantial swings in performance and stability over the decade surrounding the 2008-2009 financial crisis and changes in every major dimension of foreign-owned banks' assets and liabilities were even larger than for domestic banks. Changes were especially large at FBAs. For example, cash balances came to dominate the assets side of FBAs’ aggregate balance sheet, with the absolute level of cash balances larger than those of domestic U.S. banks beginning in 2011, despite the fact that total assets of domestic U.S. banks are five times the assets of FBAs. Further, the recent unprecedented build-up of cash balances by FBAs was almost entirely composed of excess reserves. Changes in FBAs' liabilities-side activities have also been large, with much funding coming from large wholesale deposits and net borrowing from their foreign parents and related offices abroad.
Topic:
Foreign Direct Investment, Fiscal Policy, Capital, Banking, and Funding
Political Geography:
North America and United States of America

55. Banks, Sovereign Debt and the International Transmission of Business Cycles

Author:
Luca Guerrieri, Matteo Iacoviello, and Raoul Minetti
Publication Date:
12-2012
Content Type:
Working Paper
Institution:
Board of Governors of the Federal Reserve System
Abstract:
This paper studies the international propagation of sovereign debt default. We posit a two-country economy where capital constrained banks grant loans to firms and invest in bonds issued by the domestic and the foreign government. The model economy is calibrated to data from Europe, with the two countries representing the Periphery (Greece, Italy, Portugal and Spain) and the Core, respectively. Large contractionary shocks in the Periphery trigger sovereign default. We find sizable spillover effects of default from Periphery to the Core through a drop in the volume of credit extended by the banking sector.
Topic:
Debt, Sovereignty, Business, Banks, and Capital
Political Geography:
Global Focus

56. International Capital Mobility: Which Structural Policies Reduce Financial Fragility?

Author:
Rüdiger Ahrend, Antoine Goujard, and Cyrill Schwellnus
Publication Date:
05-2011
Content Type:
Policy Brief
Institution:
The Organisation for Economic Co-operation and Development
Abstract:
International capital mobility: Which structural policies reduce financial fragility?
Topic:
Fragile States, Economic structure, Mobility, Fiscal Policy, and Capital
Political Geography:
Global Focus

57. International Capital Flows and the Returns to Safe Assets in the United States, 2003-2007

Author:
Ben S. Bernanke, Carol C. Bertaut, Laurie Pounder DeMarco, and Steve Kamin
Publication Date:
02-2011
Content Type:
Working Paper
Institution:
Board of Governors of the Federal Reserve System
Abstract:
A broad array of domestic institutional factors--including problems with the originate-to-distribute model for mortgage loans, deteriorating lending standards, deficiencies in risk management, conflicting incentives for the GSEs, and shortcomings of supervision and regulation--were the primary sources of the U.S. housing boom and bust and the associated financial crisis. In addition, the extended rise in U.S. house prices was likely also supported by long-term interest rates (including mortgage rates) that were surprisingly low, given the level of short-term rates and other macro fundamentals--a development that Greenspan (2005) dubbed a "conundrum." The "global saving glut" (GSG) hypothesis (Bernanke, 2005 and 2007) argues that increased capital inflows to the United States from countries in which desired saving greatly exceeded desired investment--including Asian emerging markets and commodity exporters--were an important reason that U.S. longer-term interest rates during this period were lower than expected. This essay investigates further the effects of capital inflows to the United States on U.S. longer-term interest rates; however, we look beyond the overall size of the inflows emphasized by the GSG hypothesis to examine the implications for U.S. yields of the portfolio preferences of foreign creditors. We present evidence that, in the spirit of Caballero and Krishnamurthy (2009), foreign investors during this period tended to prefer U.S. assets perceived to be safe. In particular, foreign investors--especially the GSG countries--acquired a substantial share of the new issues of U.S. Treasuries, Agency debt, and Agency-sponsored mortgage-backed securities. The downward pressure on yields exerted by inflows from the GSG countries was reinforced by the portfolio preferences of other foreign investors. We focus particularly on the case of Europe: Although Europe did not run a large current account surplus as did the GSG countries, we show that it leveraged up its international balance sheet, issuing external liabilities to finance substantial purchases of apparently safe U.S. "private-label" mortgage-backed securities and other fixed-income products. The strong demand for apparently safe assets by both domestic and foreign investors not only served to reduce yields on these assets but also provided additional incentives for the U.S. financial services industry to develop structured investment products that "transformed" risky loans into highly-rated securities. Our findings do not challenge the view that domestic factors, including those listed above, were the primary sources of the housing boom and bust in the United States. However, examining how changes in the pattern of international capital flows affected yields on U.S. assets helps provide a deeper understanding of the origins and dynamics of the crisis.
Topic:
Finance, Capital Flows, Securities, and Capital
Political Geography:
North America and United States of America

58. ABS Inflows to the United States and the Global Financial Crisis

Author:
Carol C. Bertaut, Laurie Pounder DeMarco, Steve Kamin, and Ralph Tryon
Publication Date:
08-2011
Content Type:
Working Paper
Institution:
Board of Governors of the Federal Reserve System
Abstract:
The "global saving glut" (GSG) hypothesis argues that the surge in capital inflows from emerging market economies to the United States led to significant declines in long-term interest rates in the United States and other industrial economies. In turn, these lower interest rates, when combined with both innovations and deficiencies of the U.S. credit market, are believed to have contributed to the U.S. housing bubble and to the buildup in financial vulnerabilities that led to the financial crisis. Because the GSG countries for the most part restricted their U.S. purchases to Treasuries and Agency debt, their provision of savings to ultimately risky subprime mortgage borrowers was necessarily indirect, pushing down yields on safe assets and increasing the appetite for alternative investments on the part of other investors. We present a more complete picture of how capital flows contributed to the crisis, drawing attention to the sizable inflows from European investors into U.S. private-label asset-backed securities (ABS), including mortgage-backed securities and other structured investment products. By adding to domestic demand for private-label ABS, substantial foreign acquisitions of these securities contributed to the decline in their spreads over Treasury yields. Through a combination of empirical estimation and model simulation, we verify that both GSG inflows into Treasuries and Agencies, as well as European acquisitions of ABS, played a role in contributing to downward pressures on U.S. interest rates.
Topic:
Finance, Interest Rates, Housing, Securities, and Capital
Political Geography:
North America and United States of America

59. Global Imbalances: A Source of Strength or Weakness?

Author:
Kristin J. Forbes
Publication Date:
07-2007
Content Type:
Journal Article
Journal:
The Cato Journal
Institution:
The Cato Institute
Abstract:
Gross capital flows into the United States totaled $1.8 trillion in 2006. When combined with the $1.0 trillion the United States sent abroad, these net capital inflows funded the U.S. current account deficit of about $800 billion.1 The source of a large proportion of these capital inflows was developing economies—especially China and major oil exporters. Why are foreigners willing to invest such massive amounts of money in the U.S. economy? And perhaps even more surprising—why are countries with low levels of investment willing to send this relatively scarce resource to a capital-abundant economy instead of investing in their own countries? Understanding the motivation behind the millions of individual decisions that drive these capital inflows is critically important to understanding if this massive net transfer of capital into the United States reflects a strength or weakness of the global economy.
Topic:
Economy, Investment, and Capital
Political Geography:
Global Focus and United States of America

60. The Welfare Implications of Global Financial Flows

Author:
Eswar Prasad
Publication Date:
07-2007
Content Type:
Journal Article
Journal:
The Cato Journal
Institution:
The Cato Institute
Abstract:
Any discussion of whether the global financial system has served the world well requires us to think about what it is that capital flows could achieve in the best of circumstances. The basic neoclassical model suggests that, with rising financial globalization, capital should flow from rich to poor countries, making people in both sets of countries better off by enabling a more efficient international allocation of capital from countries where capital is less productive to those where it ought to be more productive. In addition, financial flows should allow for more efficient sharing of risk across countries, thereby facilitating the smoothing of national consumption against countryspecific shocks to national output. These benefits are likely to be greater for developing countries as they have less capital and more volatile growth, implying that both the growth and risk sharing benefits would be larger for them.
Topic:
Economy, Welfare, Capital, and Financial Systems
Political Geography:
Global Focus